<scp>ESG</scp> Performance and Corporate Financing: An Analysis From the Perspective of Substitution Effect

ABSTRACT We examine the impact of environmental, social, and governance (ESG) performance on corporate short‐term financing structure, with particular focus on trade credit and bank loans. Using 28,785 firm‐year observations from all A‐Share listed companies in China between 2009 and 2020, we find that superior ESG performance reduces financing costs. Based on the pecking order theory, we find that such companies tend to rely more on trade credit, highlighting a substitution effect between trade credit and bank loans. This substitution effect is more pronounced for companies that face higher financing constraints, possess stronger competitive advantages, are relatively smaller in size, and operate in regions subject to stringent environmental regulations. A further examination of bank loans reveals that trade credit mainly substitutes for short‐term loans, with no significant effect on long‐term loans. Additionally, such companies benefit from bank loans at lower cost. The results remain robust after addressing concerns related to alternative measurements of key variables, endogeneity problems, and special samples. Overall, this research advances our understanding of ESG performance as a determinant of financing structure helps policymakers establish a holistic framework to improve corporate ESG performance.